DOMINICAN REPUBLIC: An Introduction to Corporate/Commercial

With an annual GDP growth rate that has hovered around 5% for decades and a forecasted 5.2% GDP growth rate for 2024, the Dominican Republic is poised to maintain its position as one of Latin America’s star performers. The fact that the presidential election scheduled for May 2024 has not slowed nor deterred economic activity, as is usually the case throughout the region, is a sign that Dominican democracy is functioning robustly.

As a result of its internal stability and sustained economic growth, the Dominican Republic has emerged as a compelling investment destination given the current geopolitical turmoil across the world. Foreign Direct Investment during 2023 reached USD4,390 billion, signaling a steady increase over 2022.

The designation of an independent General Prosecutor has signaled the present Public Administration’s willingness to combat corruption within the government. Several high-profile cases are presently being heard by the local courts. The country has also markedly improved its ranking in international indexes such as the Corruption Perceptions Index published by Transparency International year over year (from a score of 28 in 2020 to 35 in 2023).

In addition to political and economic stability, the Dominican Republic has additional strengths including a privileged geographical location, free trade agreements with main world economies and trading blocs (including the USA and the EU), a pro-business administration, a young workforce that is increasingly bilingual, and modern infrastructure that is being ramped up in view of governmental plans to capitalise on nearshoring.

Positioning as a Logistics Hub 

The current administration is vying for the Dominican Republic to become a logistics hub in the Caribbean considering its strategic location. The logistical performance in the country is impressive (average export times of eight hours and import times of ten hours). There is a bill working its way through the Senate to provide a stronger regulatory framework for logistic centers and operators. Recently, President Abinader also issued Decree 148-22 whereby the purchase of fuel for departing ships and aircraft carrying exported goods would not be subject to the payment of selective consumption tax (ISC), furthering the country’s advantage as a logistics hub.

A prime example of the country’s shift is the ongoing development of the Punta Cana Free Trade Zone that will operate as the first Aerial, Maritime and Terrestrial logistic center combined with a Free Trade Zone Park.

Tourism 

Tourism has been for the last decade the main strut holding the Dominican economy. During 2023, the country received more than 10 million travelers for the first time in history. Tourism now accounts for 19% of GDP and is expected to continue growing. During 2023, tourism was also the main recipient of Foreign Direct Investment receiving USD1,182.1 billion (and surpassing the energy sector that received USD1,071.1 billion).

In addition to a rapid post-pandemic recovery, the sector is seeking a transition to higher end offerings that are popping up alongside the northern coastline Chains such as Four Seasons and St. Regis are developing projects in the country. Under the country’s recent Public-Private Partnership law, new projects are being developed such as Cabo Rojo in Pedernales. New ferry and maritime terminals are also being built for interisland tourism.

Intellectual Property 

The Dominican Republic has been removed from the United States Special 301 Report of the USTR (for the first time since 1996) as a recognition of the significant progress with intellectual property enforcement and transparency. This exclusion constitutes a milestone in the Dominican history and signals an improvement in our foreign investment climate.

Stock Market Developments 

In August 2023, the first direct initial public offering took place after Law 163-21 was enacted to promote public offerings (previously an indirect IPO by means of a trust structure had been issued in 2019). In October 2023, a second initial public offering took place when a financial institution issued preferred shares.

More IPOs are expected to follow given the recent positive experience and desire by retirement investment fund managers (AFPs) to diversify their holdings.

First Asset Acquisition under a Bankruptcy Plan 

The first asset acquisition out of bankruptcy took place in 2022 when Munné, SRL, one of the country’s largest traditional manufacturers of cacao-based products (like a US Section 363 Sale) became insolvent. The transaction was the first acquisition of its kind under the country’s insolvency regime, that was subject to a comprehensive overhaul in 2015.

This benchmark transaction demonstrated successful reorganisation is possible under the new insolvency regime.

Private Equity and Direct Lending 

During 2023, Dominican private equity funds increased their assets under management by 60% to USD4,068,400,000.00. In addition to investing in strategic sectors such as hotels and tourism, energy infrastructure, and real estate, private equity funds are increasingly acquiring private companies (both on a standalone basis and with foreign investors) that are ready for increased growth or whose owners wish to exit. In addition, private equity funds are increasingly engaged in direct lending, in many cases competing head-to-head with established financial institutions that traditionally controlled corporate lending in the Dominican Republic.

The Energy Sector 

With a rising yearly energy demand, the Dominican government is focused on procuring the generation of new electricity sourced from renewable and conventional powerplants at competitive prices. There are a total of 26 renewable energy projects under construction that are scheduled to enter operation between 2024 and 2025 and generate a total of 1,451 MW.

The Unified Board for the Electricity Distribution Companies (EDE) is expected to adjudicate a tender later this Summer for two combined cycle powerplants of up to 400 MW. Under this administration, a total of 2,000 MW to be generated by conventional thermic powerplants has been adjudicated through international public tenders.

The losses suffered by the Electricity Distribution Companies due to leakage, theft, and poor invoicing, among other causes, remains a thorny political issue that requires increasing governmental subsidies that are expected to reach 1.4% of GDP in 2024. New measures are expected after the May elections to reduce the deficit.

In the renewable energy arena, it is noteworthy to point out that the first photovoltaic powerplant with a battery energy storage system is being constructed and more are expected to follow given recently issued regulatory guidelines.

Free Trade Zones 

There are currently more than 80 parks scattered throughout the Dominican Republic housing more than 700 companies operating under a highly competitive free trade zone regime that is mainly composed of industrial and service operations. Given the renewed discovery of the merits of nearshoring in an increasingly disjoined world, the free trade zone sector has sustained steady growth over the last years. This growth has also been characterized by an expansion into more complex manufacturing such as medical devices, that now account for 31.3% of all free trade zone exports.

The Dominican Republic is also considered a prime candidate for the development of nearshored advanced manufacturing facilities for semiconductors and the like because of opportunities provided under the United States’ Semiconductor Act (CHIPS) and the US Inflation Reduction Act (IRA).

Transactional Structures and Trends 

Share purchases remain the preferred way to undertake transactions in the local market given that asset purchases require additional work relating to the transfer of assets that in the case of large enterprises can entail significant time and effort. Mergers and de-mergers remain seldomly used because of the heightened implementation timeframe due mainly to the Dominican Tax Agency’s response times.

Most transactional activity is being seen in the energy, tourism, and infrastructure sectors.

Upcoming Reforms 

A tax reform to increase government income, decrease tax informality, and reconsider incentives to sectors that are considered “mature” is expected when the elected administration takes power in August 2024. Reforms are also being discussed and negotiated to modify the Labor Code to increase hiring and dynamism in the workplace market and consider post-Covid developments such as hybrid workplaces. Other important reforms are expected regarding public procurement and mining.

President Abinader also announced recently, during a sidebar, that a bill to amend the current Corporation Law is being assessed, with the aim of granting greater flexibility and streamlining investment.

The Sum of all Parts 

The Dominican Republic continues to be a stable and attractive democracy open for investment and business. Over the course of the last forty years, several broad structural reforms have transformed the country from an economy dominated by agroindustry (where sugar cane was the bread-and-butter crop) to an open-market resilient and diversified economy that maintains a sustained growth with room to further develop certain sectors such as mining.

Certain social and political challenges remain, as throughout most of Latin America, concerning the adequacy of wealth distribution, the quality of public education, and the handling of public debt, yet the Dominican Republic remains ripe for further development and such challenges are not unsurmountable.

It is expected that the Dominican Republic will continue to focus on increasing transparency and implementing favorable business policies.

All in all, the Dominican Republic maintains its position as one of the continent’s top performers.